Of bailouts, Democratic betrayals and other business as usual…

The Bailout Deal: The Rich Haven’t Won Yet

Dateline: 29 September 2008 | [print_link]

Act One of the great Wall Street bailout debate has now ended. The agreement that lawmakers and the White House announced Sunday essentially tried to buy time — by committing the federal government to purchasing up to $700 billion of “troubled assets.” But the American people weren’t buying.

Why did the bailout agreement fail in today’s House vote? The bailout package, at root, left too many fundamental questions unanswered. No one quite knew, despite the over 100 pages of bailout bill text, exactly where all the dollars from that $700 billion pot were going to go — and where the dollars in that pot were going to come from.

How many bailout dollars, for instance, would go to feathering the already opulent nests of Wall Street executives? And how much of the bailout cost would ultimately fall on taxpayers?

Negotiators acted as if these questions had all been satisfactorily resolved. They trumpeted the provisions in the bailout deal that spoke to restraining executive pay. They’re also emphasized the provision that would have given taxpayers an equity stake — shares of stock — in bailed-out companies.

These provisions certainly did represent a clear step forward over the blank-check bailout that Treasury Secretary Henry Paulson originally proposed. But these added provisions didn’t go nearly far enough.

An equity stake would indeed return dollars to taxpayers, but not until years down the road, and only if the bailed-out companies recover enough to see their share prices rise.

And the bailout’s executive pay provisions didn’t set a specific lid on the compensation that can go to top execs at bailed-out companies. The key bailout provision on executive pay merely directed Treasury Secretary Paulson to “require that the financial institution meet appropriate standards for executive compensation and corporate governance” — without defining “appropriate.”

Bailout critics consider that a big mistake.

“Secretary Paulson amassed a personal stock stash worth over three-quarters of a billion dollars as the CEO at Goldman Sachs,” notes Institute for Policy Studies analyst Sarah Anderson. “He hardly strikes us as the appropriate arbiter of what’s appropriate and what’s not.”

Bailout critics are also demanding that lawmakers make America’s high-finance power-suits pay now for the mess they’ve created — by having the federal government tax the rich, not just borrow from them.

Progressive groups have already begun laying out specific proposals— a tax on speculative transactions, for one, and a tax surcharge on household wealth over $10 million — that could offset the bailout’s upfront cost and raise dollars to stimulate the “real” economy that America’s working families inhabit.

Some lawmakers last week did make an effort to weave specifics into the bailout bill. Rep. Henry Waxman from California proposed a $2 million cap on executive pay at bailed-out companies, and Senator Max Baucus from Montana promoted a provision that would deny bailed-out corporations tax deductions on any executive pay over $400,000. [Big deal!]

Interestingly, GOP Presidential candidate John McCain, in a comment early last week, called for capping pay for bailed-out execs at the current compensation of the federal government’s highest-paid employee. That employee, the President, currently makes $400,000.

The bailout deal spelled out Sunday did, to be sure, include a variation on the Baucus proposal, a $500,000 cap on the executive pay certain bailed-out firms could deduct from their taxes.

The legislation also prohibited “golden parachutes” — severance windfalls — for execs who bail out of bailed-out companies and gave fed officials the greenlight to recover “any bonus or incentive compensation paid to a senior executive officer” based on phony accounting maneuvers.

But the bailout legislation placed no limit on the pay that could go to executives at bailed-out companies — or the executives of the companies hired to manage the “troubled assets” the government would have gone on to buy in the bailout.

What would an appropriate limit be? The Washington, D.C.-based Institute for Policy Studies notes that $400,000 equates to about 25 times the pay of the lowest-paid federal worker. That’s the same pay ratio, the Institute reminded lawmakers last week, that Peter Drucker, the founder of modern management science, wanted to see between top and bottom in private-sector corporations.

Any pay gap wider than 25-to-1, as a recent Business Weekcommentary on Drucker’s work observes, undermines the teamwork that modern enterprises need to operate effectively. The actual pay gap last year between U.S. CEOs and their workers: 344 times.

A 25-to-1 executive pay standard might even get the support of some moderate lawmakers — like Senator Dianne Feinstein.

“Put them in their yachts,” responded Feinstein, “and ship them out to sea.”

Ronald Reagan’s Favorite Loaded Question

John Schmitt and Hye Jin Rho, The Reagan Question: Are You Better Off Now Than You Were Eight Years Ago? Center for Economic and Policy Research, September 2008

The most surreal moment in last week’s nonstop bailout debate in Washington? That surely came Friday when House Republicans, after loudly blasting greed on Wall Street, pronounced that the nation desperately needs to suspend taxes on capital gains, a move that would save Americans making over $10 million dollars over $30 billion a year.

The House GOPers, bless their souls, were merely resorting to what they know best: the Ronald Reagan economic playbook. Have a problem? Cut taxes — on the rich.

Ronald Reagan, of course, hasn’t been around for some time, but George W. Bush has followed the Reagan playbook faithfully. So why not this year ask, suggest economists John Schmitt and Hye Jin Rho, a variation of the same question that Ronald Reagan famously asked in the 1980 election campaign: Are you better off today than you were eight years ago?

Schmitt and Rho, in this just-released new paper, compare the American economy in 2008 with the American economy of 2000 on 25 separate economic measures. On 23 of these measures, America and Americans are doing worse.

The price of gas? Inflation-adjusted, that stood at $2.03 then, $4.09 now. College tuition at a public four-year school: $4,221 per year then, after adjusting for inflation, $6,185 now. Wages: up 8.2 percent in the eight years before 2000, up only 1.8 percent in the eight years since.

Some figures in the Schmitt-Rho analysis simply stagger. The number of Americans without health insurance then: 38.7 million. Now: 45.7 million.

But let’s not let Schmitt and Rho paint too depressing a picture. Some people, after all, can definitely claim they’re better off today than they were eight years ago. Our most affluent 1 percent, for instance.

To enter the ranks of the nation’s top 1 percent back in 2000, you needed to have an income of at least $313,469. Here in 2008, incomes for the top 1 percent now start at $462,000.

Four more years! For the rich, eight would be even better.

Too Muchis published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org.

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Other views on the bailout to nowhere

Something funny happened on the way to the Big Bailout of 2008…

People serious about change should support Cindy Sheehan’s candidacy against Pelosi in the San Francisco area.

WE OFFER SEVERAL ADDITIONAL TAKES ON THIS EPOCHAL EVENT

TAKE ONE: from USALONE.COM & Cindy Sheehan

The Democrats sheepishly vote for approval of a bailout plan scandalously inadequate to protect the public interest, let alone establish long-term safeguards. The plan, rushed through Congress under the pretext of imminent crisis, is also not bold enough to take the initiative and truly nationalize the banking system. Meanwhile, across the aisle, small-town conservatives and libertarians, besides heavy posturing, vote a resounding “NO!” as many of them laughingly confuse the bailout’s “socialism for the rich” for real socialism. In this ludicrous scenario, the “NO” vote momentarily pits true believers in free-market capitalism, usually found in rural America and the core of the Red States, against their more sophisticated, more cynical (and less doctrinaire) big corporate globalizing brethren, who have no problem asking for and receiving government assistance.

What’s wrong with this picture? The Democrats in Congress have put themselves in the position of pushing a bailout for billionaires, one that the public is OVERWHELMINGLY opposed to, at the behest of the most despised president in American history and his corrupt, crony henchmen. We know for a fact that Congress has already received hundreds of thousands of emails in protest, at times the capitol servers last week nearly ground to a halt.

And yet they are still plowing ahead with their condescending, “we know better than you” attitudes, on the basis of SECRET briefings from Wall Street wolf Paulson, that probably are just as bogus as the secret briefings on weapons of mass destruction that suckered them all into supporting the invasion of Iraq, another hideous policy blunder. The ONE redeeming feature of the bill, to allow bankruptcy judges to give distressed homeowners some kind of payment relief, is exactly the one that’s now been stripped out.

So what are we the American people to do? Just shut up about it all and leave the “done deals” to the done dealers? Hell, No! We send twice as many emails, and make four times as many phone calls tomorrow. Here are the toll free numbers, 800-828-0498, 800-473-6711, USE THEM, and if you can’t get through right way (another little game they play down there) use this action page to send them all instant emails.

And if they still won’t listen we vote every one of their cowardly butts out of office the very next chance we get.

And that chance STARTS in just a little over a month, where true independent Cindy Sheehan can change the entire political equation overnight by defeating the most tone deaf of them all, Nancy Pelosi, in the Congressional race in San Francisco. But that’s only if you, yes YOU, get off of YOUR butts, and do everything you can to help this valiant woman, who has demonstrated more real courage in standing up to the Bush dictatorship than member of Congress in a so-called leadership position.

Your mission, if you don’t want to continue to be punked out for the rest of our lives, as things get worse and worse and worse, is to act now, to do everything you could have done, to remove Nancy Pelosi, the most gullible political fool since Neville Chamberlain, from office.

And what if you don’t have any money? No excuses. Do you have a telephone? Does it allow you to place outgoing tollfree calls? So after you call Congress, Cindy needs phonebankers, lots of phone?
bankers, now. NOW, now. Use the link on the page above to volunteer.

What Congress is being stampeded into doing, again, is EXACTLY backwards. Would you buy a “hen protection plan” from one of the foxes? There is a real simple solution to this whole mess. These institutions are in trouble mostly because they were looted by their own corporate executives. We march an army of forensic accountants in there, and tell those Wall Street pigs that if they don’t find the money fast they are all going to jail.

And then we file negligence lawsuits against them all, to recoup every dime that disappeared. Our dear Secretary of the Treasury Paulson pulled down hundreds of millions all by himself. And now he
wants the American people to make up the difference out of OUR pockets? He can practically finance the bailout PERSONALLY. And if there were any justice in the world he would.

And let them all know, that their job description is NOT ignoring the will of the American people.

Paid for by Cindy Sheehan for Congress

Donations to Cindy Sheehan for Congress are not tax-deductible

Please take action NOW, so we can win all victories that are supposed?
to be ours, and forward this alert as widely as possible.

Black Monday?

By MIKE WHITNEY

TODAY the US House rejected Treasury Secretary Paulson’s $700 billion Emergency Economic Stabilization Act of 2008. Paulson said he had the votes, but Paulson was wrong. The House bucked Paulson’s claim that buying up the illiquid mortgage-backed assets from the nation’s banks would be enough to save the financial system from an impending meltdown. The jury remains out on that question, too. Professor Nouriel Roubini, chairman of Roubini Global Economics, summed it up like this, “You’re not resolving the two fundamental issues: You still have to recapitalize the banking system, and household debt is going to stay high”. A large number of economists believe Roubini is right.

The bill would not solve the underlying problems. There is a crisis. The banking system is undercapitalized, the credit markets are frozen, and foreign creditors are beginning to slow their purchases of US debt. It’s all bad. At the same time the number of casualties among the financial giants–Bear Stearns, Indymac, AIG, Lehman, Washington Mutual–continues to grow. Three more struggling European banks were added to the list of financial institutions that needed emergency government assistance this past weekend. It’s no wonder Congress feels like they have to do something to stop the bleeding.

Before the stock market opened on Monday, the futures markets had slumped heavily into negative territory, while the TED spread, an indicator of stress in interbank lending, had widened to 3.19, a level that suggests another rocky week of trading ahead. Could this be another Black Monday?

Paulson’s bill was designed to avert a system-wide crash by clearing the banks’ balance sheets so they could resume extending credit to consumers and businesses. The hope was that massive infusion of capital would “turn back the clock” to the happy days of low interest speculation and bubble economics. Paulson is a “one trick pony” who firmly adheres to the belief that wealth creation depends on maximum leverage and an ever-weakening currency. But that world view is no longer applicable after reaching Peak Credit, where consumers are no longer able to make the interest payments on their loans and businesses and financial institutions are forced to curb their spending and dump their toxic assets at firesale prices. The system is deleveraging and nothing can stop it. Paulson has yet to accept the new reality.

Besides, there was no guarantee that the banks would use the money in the way that Paulson imagines. As one Wall Street veteran explained to me, “I don’t see one penny of that $700 billion ending up helping the broader economy. I see it being used to prop up share prices so the insiders can salvage as much as possible when dumping their shares”.

Indeed, the $700 billion is just part of a massive “pump and dump” scheme engineered with the tacit approval of the US Treasury and the Federal Reserve. Once the banksters have offloaded their fraudulent securities and crappy paper on Uncle Sam, they will do whatever they need to do pad the bottom line and drive their stocks up. That means they will shovel capital into hard assets, foreign currencies, gold, interest rate swaps, carry trade swindles, and Swiss bank accounts. The notion that they will recapitalize so they can provide loans to US consumers and businesses in a slumping economy is a pipe dream.

The US is headed into its worst recession in 60 years. The housing market is crashing, securitization is kaput, and the broader economy is drifting towards the reef. The banks are not going to waste their time trying to revive a moribund US market where consumers and businesses are already tapped out. No way; it’s on to greener pastures. They’ll move their capital wherever they think they can maximize their profits. In fact, a sizable portion of the $700 billion will likely be invested in commodities, which means that we’ll see another round of hyperbolic speculation in food and energy futures pushing food and fuel prices into the stratosphere. Ironically, the taxpayers’ largesse will be used against them, making a bad situation even worse.

Then again, if a rehabbed bill isn’t passed, no one can predict with certainty what will happen. Here’s how Tim Shipman summed it up in “Bailout Failure Will Cause US Crash”, in the UK Telegraph:

“Officials close to Paulson are privately painting a far bleaker portrait of the fragility of the global economy than that advanced by President George W Bush in his televised address last week. One Republican said that the message from government officials is that ‘the economy is dropping into the john.’ He added: ‘We could see falls of 3,000 or 4,000 points on the Dow [the New York market that currently trades at around 11,000]. That could happen in just a couple of days.

‘What’s being put around behind the scenes is that we’re looking at 1930s stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. It’s going to be really, really nasty.'”

The fear on Capitol Hill is palpable, especially among the Democrats who have led the effort to pass Paulson’s boondoggle ASAP. Speaker of the House, Nancy Pelosi, and fellow Democratic Party leaders, Chris Dodd, Harry Reid and the blabbering blowhard from Massachusetts, Barney Frank, did everything in their power to sandbag dissenters, quash resistance, and rush the bill to a vote without the usual deliberation and debate. Rep. Marcy Kaptur (D-Ohio) was one of many angry members of congress who lashed out at Pelosi’s highhandedness.

It’s all caught on a one minute video:

Rep. Marcy Kaptur: “The normal legislative process that should accompany a monumental proposal to bail out Wall Street has been shelved. Yes, shelved! Only a few insiders are doing the dealing.

These criminals have so much power they can shut down the normal legislative process of the highest lawmaking body in this land. All the committees that should be scanning every word that is being negotiated have been benched. And that means the American people have been benched. We are constitutionally sworn to protect this country against all enemies foreign and domestic, and yes, my friends, there are enemies….The people who are pushing this bill are the very same ones who are responsible for the implosion on Wall Street. They were fraudulent then; and they are fraudulent now. We should say No to this deal”.

Republicans were equally furious at the way the Pelosi Politburo kept the rank and file out of loop as much as possible. Rep. Michael Burgess (R-Texas) summarized the feelings of a great many congressmen who felt they were being railroaded by Pelosi and Co: “We have seen no bill. We have been here debating talking points …House Republicans have been cut out of the process and derided by the leaders of the House Democrats as “unpatriotic” for not participating in supporting the bill. Mr. Speaker, I have been thrown out of more meetings in the last 24 hours than I ever thought possible as an elected official of 800,000 citizens of N. Texas….Since we didn’t have hearings, since we didn’t have markup, let’s at least put this legislation up on the Internet for 24 hours and let the American people see what we have done in the dark of night. After all, I have never gotten more mail on a single issue than on this bill that is before us tonight.”

Rep Dennis Kucinich (D-Ohio) gave the best speech of the day railing against the financial industry and defending the interests of working class Americans.

Rep. Dennis Kucinich: “The $700 bailout bill is being driven by fear not fact. This is too much money, in too short of time, going to too few people, while too many questions remain unanswered. Why aren’t we having hearings…Why aren’t we considering any other alternatives other than giving $700 billion to Wall Street? Why aren’t we passing new laws to stop the speculation which triggered this? Why aren’t we putting up new regulatory structures to protect the investors? Why aren’t we directly helping homeowners with their debt burdens? Why aren’t we helping American families faced with bankruptcy? Isn’t time for fundamental change to our debt-based monetary system so we can free ourselves from the manipulation of the Federal Reserve and the banks? Is this the US Congress or the Board of Directors of Goldman Sachs?”

There was greater opposition to the Paulson bill than any legislation in the last half century. The groundswell of public outrage has been unprecedented, and yet, Congress, completely insulated from the demands of their constituents, continues to blunder ahead following the same pro-industry script as their ideological twins in the White House. There’s not a dime’s worth of difference between the two parties. Not surprisingly, neither Pelosi nor any of the Democratic leadership has even met with any of the more than 200 leading economists who have stated unequivocally that the bailout will not address the central problems that are wreaking havoc on the financial system. Instead, they have caved in to Bush’s demagoguery and the spurious claims of G-Sax bagman Henry Paulson, a man who has misled the public on every issue related to the subprime/financial fiasco so far.

There are parts of Paulson’s Emergency Economic Stabilization Act of 2008 that every US taxpayer should understand, even though the media is keeping those facts obscured. In sections 128 and 132; the proposed bill would have suspend “mark to market” accounting. This means that the banks would no longer be required to assess the worth of their assets according to what similar assets fetched on the open market.

For example, Merrill Lynch just sold $31 billion of mortgage-backed securities for $6 billion, which means that similar bonds should be similarly priced. Simple; right? The banks need to adjust the value of those assets on their balance sheet accordingly. This gives investors and depositors the ability to know whether their bank is in bad shape or not. But Paulson’s bill lifted this requirement and allowed the banks to assign their own arbitrary value to these assets, which is the same old Enron-style accounting scam.

Paulson’s bill also proposed the “Elimination of FASB 157 and 0% reserves”. This is just as sketchy as it sounds. FASB or Financial Services Regulatory Relief Act reads:

“Federal Reserve Banks are authorized to pay banks interest on reserves under Section 201 of the Act. In addition, Section 202 permits the FRB to change the ratio of reserves a bank must maintain relative to its transaction accounts, allowing a zero reserve ratio if appropriate. Due to federal budgetary requirements, Section 203 provides that these legislative changes will not take effect until October 1, 2011.”

It’s all legal mumbo jumbo to conceal the fact that the banks can continue to operate with insufficient capital, which is why the system is currently blowing up. It all get’s down to this: The reason the system is exploding is because the various financial institutions have been allowed–via deregulation–to act as banks and create as much credit as they choose without a sufficient capital base. When one reads about massive deleveraging, this relates directly to the fact that under-capitalized businesses were operating with too much debt in relationship to their capital. That’s it in a nutshell; forget about the CDOs, the MBSs, the CDS and the whole alphabet soup of derivatives garbage. They were all inserted into the system so Wall Street landsharks could expand credit without supervision and balance trillions of dollars of debt on the back of a one dollar bill. This is why Paulson wants to suspend the rules which would bring credibility and trust back to the system. After all, that might impinge on Wall Street’s ability to enrich itself at the public’s expense.

Nouriel Roubini sites a study by Barry Eichengreen, “And Now the Great Depression”, which points out why Paulson’s $700 billion plan is likely to fail:

“Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is NOT the most effective and efficient way to recapitalize the banking system….”A recent IMF study of 42 systemic banking crises across the world provides evidence of how different crises were resolved. “First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.” (Nouriel Roubini’s Global EonoMonitor.)

In short, it wouldn’t work. Nor was it designed to work. The bill was just Paulson’s way of carving a silver canoe for he and his brandy-drooling investor buddies so they can paddle away to some offshore haven while the rest of us drown in a bottomless ocean of debt.

Bailing Out

John Cassidy | The New Yorker

IF BARACK OBAMA is victorious on November 4th, someone on his transition team should send inauguration tickets to Richard Fuld, the chairman and chief executive of Lehman Brothers. For months, Obama had struggled to promote the sense—which was not altogether confirmed by the official statistics—that the economy was in real trouble. Back in March, in New York, he gave a thoughtful speech, tracing the sub-prime crisis to lax oversight, and calling for a major overhaul of regulatory policy. The serious newspapers reported the event, and that was that. By Labor Day, the McCain campaign had managed to reframe the economic debate—in as much as there was one—around gas prices, offshore drilling, and Obama’s purported plan to raise taxes on ordinary Americans. (Actually, his tax plan would leave more than ninety per cent of households paying less money to the government.) Some polls even showed John McCain outscoring Obama on economic issues.

Enter Fuld. The trouble began during the summer lull on Wall Street, when he neglected to find an outright buyer for his faltering firm. That mistake was followed by the news, on September 9th, that a Korean bank that had considered investing in Lehman was withdrawing. Three days later, the government informed Wall Street that it would not bail out Fuld’s firm. Coming less than a week after the U.S. Treasury’s takeover of the mortgage giants Fannie Mae and Freddie Mac, the sight of the venerable investment bank filing for Chapter 11 protection spooked the markets, which experienced their biggest drop since 2001. Then, on September 16th, the Federal Reserve extended an eighty-five-billion-dollar loan to American International Group, the largest insurance company in the country, sparking panic on Wall Street. The economy was suddenly at the center of the campaign, which is where it should have been all along.

In the past few days, Obama has had the demeanor of a man who fell out a window and landed on a trampoline; McCain has looked like someone who thought he had won the lottery only to discover, en route to the prize ceremony, that he had been sold a phony ticket. The epizootic in the financial markets resurrected doubts about the wisdom of McCain’s decision to pass over the business-minded Mitt Romney as his running mate, a choice that left him to face alone tough questions about economics—his least favorite subject. Last week, McCain restated his belief that the fundamentals of the economy were strong and flip-flopped on the regulation of Wall Street. “How is it supposed to reassure people to hear Mr. McCain intone, as he did yesterday, the words ‘derivatives’ and ‘credit default swaps’ as if it’s the first time he’d ever heard of them?” the editorial page of the Wall Street Journal wondered.

No matter who wins the election, the economy has undeniably entered a new phase. John Kenneth Galbraith’s comment that in America the only respectable type of socialism is socialism for the rich has never seemed more apt. The Treasury Secretary, Henry Paulson, and the Fed chairman, Ben Bernanke, had good reasons for nationalizing Fannie Mae and Freddie Mac, which help provide mortgages to tens of millions of American families. The rescue of A.I.G. was more questionable, but Paulson and Bernanke feared that letting it fail would cause chaos in the global financial system; hidden inside the insurance company was a financial-products division that had sold other firms all manner of exotic derivatives, including credit-default swaps, which guaranteed the value of bonds. Had A.I.G. gone under, those swaps would have been practically worthless.

Whatever the merits of saving A.I.G., many financial experts agree that the Bush Administration’s policy of buying more time for the financial industry to fix itself (at the Fed, this is known as the “finger-in-the-dike strategy”) needs supplementing with a direct attack on the slumping property market—the source of all the losses. It was in this context that, last Friday, Paulson announced a plan to have the government relieve the banks and investment banks of their most distressed mortgage assets. The sums involved would be huge—perhaps as much as two trillion dollars, according to Harvard’s Kenneth Rogoff, a former chief economist at the International Monetary Fund. (That amount is more than triple the cost of the Iraq war so far.) Marketing such an enormous bailout to the American voters will not be easy, but history demonstrates that often the only way to resolve a collapse in the banking system is for the government to step in and socialize the losses. That is what happened during the savings-and-loan crisis of the late nineteen-eighties, when the government set up the Resolution Trust Corporation to dispose of the assets of insolvent thrifts. The total cleanup cost to the taxpayers, in today’s dollars, was nearly two hundred billion.

If Congress goes along with Paulson’s plan—and the early indications are that it will—the quid pro quo, at least for a time, will be more oversight of the financial industry and a witch hunt for the Wall Street chiefs who got us into this mess. The hunt has already begun. Last week, McCain proposed an investigation modelled on the 9/11 Commission, and congressional Democrats scheduled hearings for as early as this week. Many details remain to be uncovered about how firms like Lehman and A.I.G. operated, but McCain and the other lawmakers should also investigate their own roles.

Beginning in 1978, when the Carter Administration abolished government restrictions on airline routes and fares, both parties began to espouse the doctrine of unfettered free markets. In some industries—airlines and telecommunications, for example—deregulation delivered lower prices and more choices, with few downsides. Then the Reagan Administration relaxed parts of the Glass-Steagall Act, a Depression-era law that restricted the activities of big financial firms. This facilitated innovation and growth but also made the system more fragile. A few years later, the Clinton Administration—after heavy lobbying by Wall Street, and vigorous encouragement from Alan Greenspan, then the Fed chairman—removed the last vestiges of Glass-Steagall. (Phil Gramm, the former Texas senator—and a McCain adviser, until he recently referred to Americans as “a nation of whiners”—co-sponsored the key piece of legislation.)

Commercial banks, such as Chase Manhattan, merged with investment banks, such as J. P. Morgan. The remaining Wall Street firms, grappling with new competition in their traditional businesses, increased their borrowing and made riskier bets. Last year, Bear Stearns, Lehman Brothers, and Merrill Lynch had more than thirty dollars of investments on their books for every dollar of capital. Having borrowed so heavily, the firms were hostage to a withdrawal of credit on the part of their lenders. After the sub-prime-mortgage market collapsed, that was precisely what they faced.

As Obama noted last week, it is no accident that the country is confronting its worst financial crisis since the Depression. Gullibility and greed caused this latest calamity, but what allowed those basic human traits to combine to such catastrophic effect was a legal and institutional framework that resulted from deliberate policy actions. Something new, from a new Administration, is needed. A new deal, you might say.